Legal services have long been among the so called “sacred cows” of corporate spending. The prevailing wisdom was, it’s better to keep paying whatever it takes for good legal representation than to tempt fate, potential plaintiffs and juries by skimping on legal fees. Those days of unquestioned spending are coming to a close, accelerated by the weak economy and the sagging revenues of law firms. It’s ironic since there’s typically an explosion of litigation during a recession. But legal services “buyers” - some of whom have had this spend in their sights for years but haven’t had the buy in from legal stakeholders to act - are now in a strong position to reduce costs.

The recession combined with the downward trending employment and profit picture in the legal field - recently highlighted in the WSJ - reveals an industry facing their first year of negative growth since the early ’90s. Firms are laying off staff, slowing hiring, trimming summer internships and even cutting some salaries and bonuses. Times are so tough that some medium sized firms, such as the Heller Ehrman example in the WSJ, are shutting their doors as rainmaking partners flee with their client rosters for larger, more financially stable firms. And although the legal field has long been treated as if it defies normal supply/demand rules, the glut of unemployed lawyers creates a “buyer’s market”, just as unemployment numbers over 6% do in other services field like temporary labor.

The financial pressure on law firms is likely to get worse before it gets better as their clients slash their own legal budgets (60% of which often goes to outside counsel). A recent survey by legal consulting firm Altman Weil revealed “75% of responding General Counsel indicated that their law departments are facing budget cuts averaging 11.5% for 2009.”

Many companies are using the economy as a catalyst for finally addressing the opportunity long seen by procurement departments to tackle legal spend. WellCare Health Plans General counsel Thomas O’Neil III summed up the situation well, stating that “maximizing efficiency and saving money is something many in-house departments have been trying to do for the last 20 years. But now the economic climate has added urgency to the goal.”

The opportunity is there, but how do you go about it?

There are many lines of attack. First and foremost is addressing the hourly billing model. Coverage of a recent meeting (login required) of over 100 in-house lawyers stated that, “most of the questions centered on moving away from the billable hour law firm model. The questioners talked about negotiating flat fees in exchange for business volume and other ways of abandoning billable hours.”

I’ll cover several billing models and other strategies here in a future post. And of course there are certain legal categories that are hotter opportunities than others, so I’ll dive into that topic as well. But the bottom line is, the legal field and how companies work with outside counsel is changing. So savvy companies will seize the opportunity, and at the very least begin the conversations with their outside counsel, while the opportunity is there.

Nick Cherrone is a Category Manager for business services in Ariba’s Global Services Organization. Nick has several years of sourcing experience with General Electric and as a logistics officer for the US Army. Nick is currently working towards his certification as a purchasing manager (C.P.M) from the Institute for Supply Management.